How to Survive the Income Tourist Invasion

Kristin Orman By Kristin Orman
Research Analyst, The Oxford Club

Dividend Investing

When I lived in New York City, I had a love-hate relationship with the city’s millions of tourists. Especially during the holiday season when they would visit by the busload.

The tourists fueled the Big Apple’s economy but also clogged up the sidewalks, making it difficult for New Yorkers to get to their jobs.

Luckily, the tourists would stay for only a short while. After that, New Yorkers could resume their fast-paced lives without further inconvenience.

The tourism pattern was a lot like what we see happening in the stock market today. Dividend stocks have been entertaining lots of visitors. But like three-day-old fish, these visitors have worn out their welcome.

These “income tourists” are on a quest for returns. In many cases, they’re new stock market investors – inexperienced and blindly reaching for yield.

Usually they’re more comfortable investing in CDs or bonds, but now they’ve been driven into stocks by near-zero interest rates. And they’re fast becoming a big risk to your dividend portfolio…

The “income tourists” are gobbling up shares of stock. They’re feasting on dividends. And as a result, they’ve driven up prices and pushed down yields.

So to find decent yields, “dividend natives” must take a detour to safer sectors and venture off the beaten path to find worthwhile income opportunities.

The Road to Safe Yields

Real estate investment trusts provide lots of opportunities for safe, juicy distributions, and they’re a great addition to your income portfolio.

So far, the income tourists haven’t discovered this sector because they’re new to the stock market and don’t understand it. Think of REITs as the unknown “locals only” restaurant tucked behind some busy tourist destination.

REITs are companies that specialize in owning real estate, typically rental properties. They distribute the vast majority of their profits to shareholders. That’s why the sector offers some of the highest yields in the market.

There are many types of REITs. Some invest in apartment or office buildings while others invest in shopping centers, hospitals or even data storage centers.

REITs often move in tandem with the real estate market. If real estate prices fall, REIT share prices fall too. So just like regular stocks, REITs can be volatile.

And keep in mind, REITs aren’t taxed at the corporate level, so shareholder distributions are taxed as ordinary income. In many cases, this tax rate is higher than the usual dividend tax rate.

A Smoother Path to Income

REITs represent the largest group of “A” and “B” rated stocks yielding more than 3%. SafetyNet Pro counts 26 top-rated REITs of all types and sizes.

Examples include “A” rated hotel owner LaSalle Hotel Properties (NYSE: LHO), which sports a yield north of 7%, and “B” rated mall leader Simon Property Group (NYSE: SPG), with a 3.15% yield.

Nearly every subsection of the REIT industry is represented. The list proves that dividend locals have plenty of income options; they just have to know where to look for them.

But REITs aren’t the only secret route to solid dividend yields. Financial stocks and master limited partnerships offer a lot of opportunity as well. Many stocks in these sectors also have yields above 3% and the cash flow to support them.

Income tourists may have crowded the stock market streets, but dividend locals have several alternate routes available to them.

When searching for dividend income, it’s best to take the detours and stay off the main drag. At least until the income tourists return to their natural habitats.

Good investing,